WASHINGTON, D.C. --The motion to delay the Department of Labor’s fiduciary rule has an uphill fight, judging by the challenging line of questioning leveled at the attorney asking for the injunction.
Philip D. Bartz opened the industry's legal assault on the federal fiduciary rule Thursday with 90 minutes of tough questioning from U.S. District Court for District of Columbia Judge Randolph J. Moss.
Bartz represents the National Association for Fixed Annuities in the first of three lawsuits against the DOL. NAFA seeks a preliminary injunction.
Moss adjourned the hearing without a decision after more than three hours of testimony.
At one point, Bartz and Moss had an extended back and forth about whether the DOL has the authority to extend ERISA law to IRAs.
"I think you understand our position on that," Bartz said in summation. "Even though you may not agree with it."
"I'm just trying to make sure I understand it," Moss replied. "I have not formed any conclusions at all at this point."
Still, Moss grilled Bartz repeatedly on a number of key points.
The judge doubted Bartz's claim that agents will have to violate state laws in order to serve the "best interest" of their clients. For example, while the fiduciary rule permits only "reasonable compensation," Bartz noted that anti-trust laws bar companies from sharing specific commission information.
In other words, it will be virtually impossible for an agent to know if he or she is truly getting the best deal for their clients, Bartz said. Moss wasn't swayed.
"You can't be violating the law for not doing something you're barred by state law from doing," he replied.
When Bartz stressed the differences between insurance sold by agents and securities sold by advisors, Moss disagreed. Advisors and agents appear to be similar, the judge said.
"The world has changed a lot" from the time ERISA law was passed in the 1970s, he added.
Lawsuit alleges DOL overreach
The lawsuit alleges the DOL rule is invalid on grounds that the agency exceeded its authority to regulate individual retirement accounts and that it improperly categorizes insurance agents as fiduciaries.
NAFA also argues that the DOL’s decision to include fixed indexed annuities (FIAs) under the Best Interest Contract Exemption (BICE) in the final rule – rather than under the less onerous PTE 84-24 as originally proposed – with no opportunity for meaningful comment and without adequate justification was arbitrary and capricious.
NAFA members were "blindsided" by the final treatment of FIAs, the lawsuit says.
"The impact will be highly detrimental to the FIA industry and its clientele. Insurance carriers will need to restructure their distribution models, because they will not be able to guarantee in a BIC that independent agents selling insurance products from different carriers have acted in the best interest of purchasers," the lawsuit reads.
As fixed insurance products and not securities, FIAs and those who create, distribute and sell them stand to be uniquely harmed by this rule, Bartz argued.
Like other lawsuits, NAFA also argues that ERISA authors never intended to allow regulators to create a new private right of action. Only Congress has that power, the lawsuit stated, citing the Alexander vs. Sandoval as case precedent.
"Congress never intended the department to speak so broadly," Bartz said.
Again, Moss had a different interpretation of the law.
"I read Sandoval differently," he told Bartz.
In their reply, Department of Justice attorneys Emily Newton and Galen Thorp argued that Congress never created any precise definition of which advisers should be regulated as fiduciaries. Instead, the law gives the DOL the freedom to regulate by establishing a “necessary and appropriate” standard, Newton said.
Thorp echoed criticism of high commissions attached to the sale of some annuities, particularly in the initial years of the product. But those commissions are not out of line in the big picture, Bartz told the judge.
"Fixed indexed annuities are held for a long, long time," he said. "When you measure the compensation over the lifetime of these products, it's not improper."
A Market Synergy lawsuit in U.S. District Court for the District of Kansas is slated to be heard Sept. 21. Three lawsuits filed by several plaintiffs in U.S. District Court Northern District of Texas were consolidated by the court and will be heard Nov. 17.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.
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All these DOL regulators and lawyers are controlled by SATANIC HATRED of the indexed annuity business. They have sold their very souls to the Devil. Their destiny is HELL and GOD Almighty will judge them for their SINS. They will suffer eternal damnation in the lake of fire, with Satan. Just read the book of Revelation in the Bible.
Agent – Kurt, Mpls, MN
No one understands the true intent of this so called rule it is designed to mske it ultimately impossible for a retiring worker t control his retirement funds so thst eventually it will leave a Reiter no choice but to go to a government plan do thst the government namely the Democrats csn grab those funds to finance the importsnt issues such as given benefits to free loaders illegals etc. Think of this do called rule as Obama care for your retirement fund this rule was crafted by apppined officials by this horrid administration that would nt know an annuity from a Cadillac it will result in great losses to the very people this administration claims to be so coneeded about many of whom were stupid enough.to vote for this president twice hopefully the Texas case which will be heard in November will be presided over by a judge who respects his court and the law and send this rule back to the dol and insist on Creech procedure and it will ultimately die as dId 151a
This may well be true, Kurt. But, it will do nothing to improve our lives in helping people gain security.
Kurt may be on to something here. So much of what Obama is about is corrosive to traditional values. Why work if you can get paid for nothing? Why go to school if wage equality initiatives win the day? Why be thrifty about debt if the gov’t will just cancel your debts anyway? Most people would agree that freedom, small business oriented capitalism and the rule of law have made America great. Maybe socialism, the breakdown of police systems, the breakdown of the traditional family, higher taxes and partisan regulation will lead us forward – or perhaps not.
Free health care has a really good ring to it. So does nearly free financial advice where the advisor is allowed to take none of his own needs into account. I don’t think Obama is actually trying to destroy FIA’s, its just an unintended consequence of seizing on something that sells so well politically – namely cheap financial advice whereby you can sue the advisor if it doesn’t work out for you. Same thing will happen here as has happened in the state health insurance exchanges – financial failure. The ultimate solution – fully government provided retirement systems.
Wow! I’m glad you’re not my advisor! Stick to salient points of why indexed annuities shouldn’t be targeted under DOL.
The fix is in. It appears the judicial branch is colliding with the executive with this overreach. Moss has made up his mind without a hearing and ignores legal precedence to support his own prejudice against the annuity industry.
I’m no legal expert. That’s just my layperson’s view of the situation.
Proves yet again that truth will always be ignored when superior dollar interests have Congressional representatives in their pocket. Banks and brokers have hated fixed annuities for decades and finally found a way to torpedo the entire industry. RIP FIAs.
Forgive my ignorance, but are not insurance products, regulated by the states and not the Fed, IRA and NQ alike?
Further, is the above the reason that the Fed could not over-reach the state of NY to allow AIG access to the assets of their subsidiary carriers?
Therefore, does that same separation exist as an additional reason to remand the DOL’s overreach to FIA’s as each state has purview individually?
Hi Mark,
I’m not sure about the AIG reference, but yes, insurance products are state regulated. This is a big reason the industry was successful in its legal fight to overturn the SEC’s Rule 151A in 2010. That rule sought to regulate FIAs as securities until a court sided with the industry.
Thanks for writing.
John Hilton
I agree with everything said above, however in my opinion there is another group who stand to profit greatly from this miscarriage of the governmental system, and that is the attorneys who will file law suit after law suit and line their pockets with fees, some government body should start and investigation into the FEES that those people get at $200, $300, $400 dollars and more per HOUR, talk about out of use usury
the reason that the DOl is trying to kill FIA’s, is that they want to stop the exodus of Federally controlled money to private insurance contracts. they have their eye on this money and want access to it at a future date. They control the banks and Wall Street, now they are after the insurance industry.
I think you nailed it. They tried to put it under the guise of protecting the consumer yea right!! Yes the government has their eyes on the money. The biggest wealth transfer this country has ever seen. Babyboomer money under government control.
It’s the lobbyist for the securities business that finally got to the DOL.
60 plus billion a year is at stake here .
Annuities are safe securities are not to suggest some safety for the consumer is good people will conserve retirement assets
And be less dependent on government at retirement, that’s a good thing
The DOL has clearly rewitten ERISA law to apply to all qualified money and is over reaching its authority. Only Congress has the legal means to write law. Why are the courts questioning attorneys? Isn’t it the job of the defense to question the plaintiffs? So are the courts exceeding their authority and ability to rule on the law?
A lot of thoughtful comments on this. I am in the DOL over-reach camp. But, I do feel this is more of the current administration’s efforts to destroy our financial system and security in the U.S.A. Obummer doesn’t want a strong America and crippling anything that can improve lives and leave us ‘less dependent’ on the government is his goal; in my opinion.
I do think NAFA needs a different approach, a different judge, and perhaps additional legal help. Judge Moss is walking all over this approach.
Wait a minute! Wasn’t the goal of the administration to address the root causes of the Recessation of 2007-2008. At issue was the forced bailout of banks, Wall Street firms and very large insurance companies. Nothing in the DOL edicts will accomplish those goals.
Punishment and increased regulation for annuity agents and financial planning specialists does nothing but ultimately hurt the general public seeking retirement guidance.
Also, the elimination of the arbitration process in favor or litigation is a giant step backwards to those who years ago formed a process that is fair to consumer and professional alike.
This unwise DOL intrusion should be termed “The Attorneys Retirement Act.”
I agree P.Q. This regulation is merely a backlash against the exodus out of the variable product and mutual fund/stock market losses from 2004 and 2008. What did they think would happen to mutual funds/stocks when they basically stole around 30% of everybody’s 401(k), 403(b), etc? Well, the middle American investing public started rolling over their employee sponsored retirement plans into fixed and indexed annuities. The market boomed and the Wall Street folks are mad. Well, you shot yourselves in the foot for that. So now penalize the annuity and insurance companies under the guise of protecting the American public? I call baloney. This rule essentially eliminate the competitiveness between Insurance Companies, by completely changing how companies can develop products which will truly help investors and fairly compensate insurance agents. In a state regulated environment, the States should be raising heck by this rule. We now enter the world of Corporate Communism in my opinion.
Free health care has a really good ring to it. So does nearly free financial advice where the advisor is allowed to take none of his own needs into account. I don’t think Obama is actually trying to destroy FIA’s, its just an unintended consequence of seizing on something that sells so well politically – namely cheap financial advice whereby you can sue the advisor if it doesn’t work out for you. Same thing will happen here as has happened in the state health insurance exchanges – financial failure. The ultimate solution – fully government provided retirement systems.
Thorp echoed criticism of high commissions attached to the sale of some annuities, particularly in the initial years of the product. But those commissions are not out of line in the big picture, Bartz told the judge. “Fixed indexed annuities are held for a long, long time,” he said. “When you measure the compensation over the lifetime of these products, it’s not improper.”
More relevant is that Gross Commission is not net income. Most “independent producers” have their own office space and staff. Business overhead for the “independent producer” may be as much as 50-60% of the Gross Commission.
To meet the “Best Interest” standard, being independent is a good start.
Pretty much all of these comments are ignoring the issue that the fiduciary rule is intended to address. Recommending an annuity, in general, or Annuity A vs. Annuity B, because of the amount of commission that will be paid is not necessarily in the client’s best interest. Since the person making the sale generally has greater knowledge and understanding of how the products work, that puts the client at a disadvantage in the negotiations. Making the seller put the client’s best interest first does not mean that the sales person cannot make a living — just that they can’t do it by robbing the client.